'Rapid refund' loans prompt warning from state attorney general

Loans can cost consumers hundreds in fees and interest and make only a few days' difference in when the taxpayer would see the funds.

With tax time around the corner, the California attorney general's office is warning of the dangers of taking out high-cost tax-refund anticipation loans, sometimes presented as "rapid refunds," that can cost consumers hundreds of dollars in fees and come with high interest rates.

The refund anticipation loans, often marketed to people who are filing electronically, "push taxpayers to borrow their own money instead of collecting their full refunds," Atty. Gen. Jerry Brown said Monday.

About 8.4 million taxpayers in the U.S. paid more than $800 million in fees on tax-refund loans in 2008 that could have been avoided, said Jean Ann Fox, director of financial services at the Consumer Federation of America advocacy group.

The loans are short-term and based on the projected amount of a taxpayer's refund, said Christine Gasparac, an attorney general's office spokeswoman.

A tax preparer offering this kind of loan will sometimes roll in the cost of tax preparation and other fees, including those that might be assessed for administrative, e-filing or processing costs, so there will be no out-of-pocket expense upfront to the client.

This can be especially attractive to people with low incomes.

"Many people don't realize how much this will cost them in the end," Fox said.

The consumers would get their refund relatively quickly anyway, the consumer advocate said. Electronic returns usually arrive within two weeks.

"There isn't much of a reason to get a tax-refund anticipation loan," Fox said.

"Don't let them talk you into anything else."

The IRS offers free assistance programs for those who need help filing their tax returns, including the Volunteer Income Tax Assistance Program, which offers help to people who make about $49,000 or less.

There is also the Tax Counseling for the Elderly Program, which provides free help to people 60 and older.

Some taxpayers may also qualify for free federal income-tax preparation through a partnership between the IRS and the Free File Alliance, a group of private-sector tax software companies.

More information on these programs is available at www.irs.gov or by calling (800) 829-1040.